BRUSSELS: Luxembourg published tightened tax rules on Tuesday, bending to pressure from the European Union to crack down on corporate tax avoidance.
The changes will tighten rules for the Luxembourg-based funding arms of multinational companies. Luxembourg has offered companies so-called “tax rulings,” which, in some cases, have allowed them to lower their tax bill by reporting lower profit margins and a lower taxable capital base. The new rules will enter into force on Jan. 1. From that point on, Luxembourg’s previous tax rulings will no longer be binding on the country’s tax authorities.
The European Commission, the EU’s executive arm, has been stepping up its efforts to close tax loopholes in Europe and putting pressure on member countries that use special tax deals to attract companies, including Luxembourg, the Netherlands and Ireland.
In October 2015, the commission ruled that the Luxembourg government had given a tax advantage to the financing arm of Fiat Chrysler Automobiles NV, which allowed it to significantly understate its profits and taxable base.
The commission found Fiat Finance and Trade had therefore reduced its taxes by €20 million ($20.9 million) to €30 million since 2012, and ordered the company to repay those amounts.
At the heart of the commission’s decisions were rules concerning so-called transfer pricing. These arrangements allow companies to legally redistribute profits within a group by charging for goods or services sold by one subsidiary to another, typically located in different countries.
Experts say companies can use transfer pricing to minimize their tax bills by shifting profits to places that offer the lowest tax rates. In some cases, the commission says, authorities negotiated selective tax treatment for those companies that guaranteed a lower tax bill.
In a statement on Tuesday, Margrethe Vestager, the European commissioner for competition, welcomed Luxembourg’s rule changes, saying they would make the country’s tax treatment of financing firms “more stringent.”
The commission has been reviewing more than a thousand tax rulings member states struck with companies. Among its most prominent decisions so far is that Ireland should recoup €13 billion in allegedly unpaid taxes from Apple Inc. Both Ireland and Apple have disputed the validity of the decision and plan to appeal.
